I’m a tax lawyer based in San Francisco (www.WoodLLP.com), but I handle tax matters everywhere. I enjoy untangling a tax mess from the past, disputing taxes with the government or planning taxes for the future. One of my specialties is advising about lawsuit payments. Whether you’re receiving or paying a legal settlement, you can probably improve your tax position. I write frequently about taxes, from expatriation to sales tax, from selling your company to restitution. I’ve written over 30 tax books, but my best seller is still Taxation of Damage Awards and Settlement Payments. Contact me at wood@WoodLLP.com.

Despite Offshore Haul, IRS Hunts Quiet Disclosures, First Time FBARs

The latest report from a government watchdog agency called the Government Accountability Office (GAO) may not be pleasure reading, but if you want to know how well the IRS attack on offshore tax evasion is coming, it is worth a look. Besides, the GAO makes recommendations to the IRS, and the IRS pays attention. Those recommendations could put some taxpayers in trouble or maybe even prison.

So-called “quiet disclosures” are evidently rampant. Taxpayers quietly amend past tax returns and FBARs to avoid the Offshore Voluntary Disclosure penalties. See “Quiet” Foreign Account Disclosure Not Enough. Billions of dollars are at stake. As the IRS ramps up its new hunt, some with foreign accounts might alter their intended course of action.

Quiet Storm. But the GAO says the IRS knows there are many quiet disclosures. The GAO analyzed 2003-2008 amended tax returns, matched them to offshore accounts and found even more quiet disclosures than the IRS. First time reporters of offshore accounts skyrocketed. The IRS is missing out on many. Find them, says the GAO.

Reports of foreign accounts nearly doubled to 516,000 from 2007-2010. If 39,000 people applied for IRS amnesty, what about the hundreds of thousands who didn’t? Many people don’t participate and make “quiet disclosures” by amending returns or just reporting prospectively. And that means several tens of billions of dollars.

Among other things, GAO says the IRS should:

Explore options to more effectively detect and pursue quiet disclosures; and

Analyze first-time offshore account reporting trends to catch people trying to avoid paying what they owe.

In fact, GAO says the IRS should identify, ferret out and pursue quiet disclosures. While the IRS is free to take action however it wants, GAO says it should look at Schedule B and see if the “I have a foreign account” box has been checked. If it wasn’t checked the prior year? Check it out!

As for the IRS, it quickly agreed with all of the GAO’s recommendations. That means we should expect a wave of audits, investigations, and action. How many and how serious they will be is anyone’s guess.

Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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Mr. Wood, I am an admirer and follower. I think you have doe a great job describing the present and future actions of the IRS insofar as foreign accounts

aimed at avoiding paying taxes. Thank you for this piece of information. But, being who you are, do you think that someday you will be interested to write a personal opinion about Americans Working Abroad (not Americans in the mainland who have hided foreign accounts in order to avoid taxes) and how they are being affected by this one fits all approach denounced by Nina Olson?? Or, I am asking too much?

Thank you very much. I trust you and above all your expertise and judgement. After living and working 30 years in the USA I came back to my country of origin about 10 years ago. I have nobody here who is a US CPA and understands about IRS Returns from Americans Abroad. I have one telephone number to call in Philadelphia (paid), I do not have representation (the congressmen from the last State I lived on do not accept e-mails from outside the USA. I have spent an enormous amount of time and money trying to do the right thing. I only learned about FBARS in 2009 when visiting my “children” in the USA. This was too late, I was already considered a criminal for not filing it before and the penalties were stiff and included 27.5% of my small life savings. There are so many things. For instance Americans in France do not pay US Income Tax on their French pensions. I do. If filling as a Self Employed I have to pay Self Employment Tax to two countries, 16% to each, having no return. I live in fear, the advices I get do not always coincide. I am slepless and in bad health. I don´t want to become a “victim”. I will listen attentivelly to your thoughts. Many thanks and regards.

Yours is a real dilemma, and shows the high cost of maintaining U.S. Citizenship with its compliance complexity and cost while being a long time resident abroad.

It would be easy to say, give up your U.S. Citizenship and end your misery, but I understand all the emotional and family considerations that weigh heavily on such a harsh action.

I empathize with you, but only you can do the cost vs benefit analysis that is necessary to make your choice. Sadly, since 2009, the cost of your dual citizenship has become very high, when one of those passports is a U.S. one. cheers

There are two things for people who have undisclosed offshore accounts to consider.

Step 1): Cleaning up past sins: With it now being a given that this account will be discovered at some point (whistleblower, bank disclosure, exchange of information etc.), you must do something. Depending on the taxing jurisdiction that means quiet amendments to past returns or voluntary disclosure. The advice of someone like Robert is critical (as this article points out); THEN

Step 2): Deciding your future: Really the choice is now between “playing the game better” (i.e. legal tax avoidance) or “leaving the game” (i.e. severing current tax liability). With governments like the US in desperate need of cash, they will be working hard to move the goalposts and continue to limit strategies and loopholes. That means more and more people leaving the game.

How does one “play the game”? I’ve seen no instructions, templates, samples or examples on how to fill out any form on the 2rd Säule or 3rd Säule, and I’m confident that similar puzzles exist in every other nation around the world. The rules for the game are undefined and unknown with exit being the most secure option, especially when one is below a certain definition.

Mr Wood. Thanks for pointing this out. I concur with the previous comment from StillAmerican regarding the negative impact on the 50+ MILLIONS IMMIGRANTS and 7+ millions american abroad.

Good analysis from the GAO, but wrong conclusions. These people don’t have a clue about human psychology and self preservation, and have a very short sighted view of the impact of their recommendations on future compliance, IMHO.

So yes, their analysis show a sharp increase of people correcting their mistakes outside of OVDI. They should be happy about that. That is a voluntary increase in compliance. That is good. That was the main purpose of their crackdown. These people are likely to stay compliant from now on bringing revenue on a future basis. Instead, GAO and the IRS want to waste time going after them for FBAR penalties, requiring resources for prosecution that are scarce right now. That’s what it means by reexamining all those quiet disclosures.

Now, let’s analyze this a little further. People chose to become compliant using QDs because the OVDI programs had penalties so high that were akin to extortion. People wanted to be compliant but not being ruined in the process, mostly because they thought it was really unfair from the IRS to start enforcing a rule that was mainly unknown to most accountants prior to 2009/2010.

So they saw QDs as a honest way to do it, paying interest and penalties on what they owed. Now, you’re telling them (and all non compliant people) that there is an even greater risk of doing that. What do you think the reaction from people who are still not compliant is going to be? Stay underground, not fix the issue at all. After all that can’t be worse than attempting a QD and being discovered. That is the message the IRS is sending. By announcing this, GAO and the IRS will dry out QDs. The only hope at this point from the IRS is that they’ll get the data from FATCA. When FATCA information exchange starts (and that may take years), they will be getting millions of records. They won’t be able go after everyone, but statitics tell you that you’ll have a better chance of NOT being audited when you’re a one in a million minnows, than one in a thousand if you attempt a QD.

Instead, the smart approach would be to promote QDs in a effort to collect taxes due on the past 3 years from still non compliant tax payers, without spending much resources. An effort to educate people and encourage QDs would bring more revenue than wasting resources on people who have already done so. Let’s face it: most non compliant people are immigrants and americans abroad. It would be easy for the IRS to get a list of those by using other government databases, and inform these people of their requirement and provide a REASONABLE way to compliance. Instead, they scare to death the few that know, to the point that they think they’re better off staying non compliant. Non sense. It is scary have people running goverment agencies this way and make such irrational decisions.

That was exactly my feeling when I read this report. It seems to me a QD bird in the hand is worth a lot more than a non compliant taxpayer still hiding in the bush trembling at the prospect of what the IRS VD programs mean for them.

Now QD filers will begin to tremble, that they might be hammered more, and boy is that good for compliance, eh?

Why they want to now threaten QDs with more examination and penalties, rather than just acknowledging that their efforts have brought in paying taxpayers with reoccurring revenue strikes me as insane.

Maybe it is part of the US. culture, that confessing your sins (or correcting your failures) must be accompanies by punishment. Just payment of what is due plus interest and normal accuracy penalties is not good enough. Would that be the case if you did a QD to correct past failure on a capital gains, say? Answer, only if there was an Capital Gain FBAR like penalty for the IRS to extract more revenue from would they ever bother.

So, what this means to me is that compliance really is NOT the objective of their efforts. FBAR penalty revenue collection is.

If you look at the table on page 13 of the GAO report at the bottom, on the 2009 OVDP, the penalties collected were $2.81 billion. Penalties, it seems were the main driver.

I don’t quickly see where they tell us what the actual new total tax additions were for the same period or what they were for the all the programs where they trumpet $5.5 billion revenue collected in their opening statement.

So, just using the 2009 total penalty data, as compared to the total revenues collected over all OVD programs 2009-2012, penalties consisted of 51% of total revenues.

Why the GAO report doesn’t provide more clarity as to total total comparisons were, I do not know. Maybe that is not a message they want you to take away that penalties were way more than back tax revenues collected.

Another interesting thing to point out is the data regarding who they “caught” in the voluntary disclosure programs and the fairness of the penalties they paid with regards to the amount of taxes owed.

People who did not know about the FBAR but entered the program paid in average 130 times the amount of tax owed (penalty of $13,320 for $103 of taxes owed over 8 years). How is that fair?

Same thing for the next percentile (penalty of $35,670 for… $1,661 of taxes owed)

People were coerced by fear of even higher penalties or even jail, like you mention in your article to pay up under the program. That is just wrong.

Why don’t they question why people are not entering their extortion program and provide a more reasonable way to compliance? Why aren’ they listening to the taxpayer advocate and instead of agree with the GAO?

The ‘haul’ that’s being referred to includes many ‘benign actors’ who will be opting out of the 2009 OVDP for the new Streamlined filing procedure which will see their penalties refunded to them, not accounted for in the GAO’s report. At least the IRS is considering culpability when dealing with offshore taxpayers, whereas the GAO would like to smack everyone with the same stick. With only OVD’s and Streamlined left (which has a very narrow window for qualifying) where will ‘benign actors’ go to seek compliance? This report is a great example of “garbage in garbage out” that creates garbage policy that is only going to decrease tax compliance.

My friend who is dual citizen never knew about FBARS. He works in the USA and in the country were I am now. I told him about it and he did not believe me at first. I insisted and told him about the need for him to comply. He told me his life savings:

US$300,000. Then I tried to figure out with him how much he would be penalized. Maybe we did this wrong because nobody seems to know the right way to do it. US$10,000.00 X 6 months = $60,000 plus 27.5% of US$200,000 (his highest account) = US$55,000. Total US$115,000… He said that he would not do it… Did we make the right accounts?

Let’s hope that Nina Olson will have some influence on the new IRS commissioner to put in place reasonable paths to compliance for minnows wherever they live…

I think you got it wrong, Thatisme. If he enters OVDI. He will have to pay whatever tax is due on 8 years + interests + 20% of that as a first penalty + 27.5% of the high balance of all foreign accounts combined (in lieu of FBAR penalty). That would be $82,500 if the $300,000 are all in the foreign country.

Now, if he does not enter OVDI, and gets audited. He will have to pay taxes due on 3 years + 20% penalty + 20% failure to file on the penalties + FBAR penalties. By the book, the non-willful FBAR penalties are on a per year per account basis. $10,000 are for accounts greater than $500,000 if I recall. Google mitigated FBAR penalties to see what the IRM recommends based on the size of each account.

Now, I think it is unlikely that the IRS throws the book at minnows. Just Me for example got a $5,000 per year penalty regardless of how many accounts he had, which is still pretty high. And yes, the statute of limitation for FBARs are 6 years, so worst case, it would be: # of accounts x $10,000 x 6.

If they find him willful, the per year FBAR penalty would be Max of ($100,000 or 1/2 max balance of foreign accounts).

Even in the worst whale cases, the IRS has “only” taken one time half the max balance of the foreign accounts (which is millions).

Thant you. Very complicated, no? And very unfair. I will pass this down to him. Of course I did not compute the Tax Lawyer ($350.00 an hour) and possibly the CPA ($1,000.00 +). I suspect that he goes around asking these professionals he possible will get different answers…

Just read this: “There are some people living overseas for whom compliance is so complex and expensive that they may consider giving up their citizenship or permanent resident status,” said Marina Hernandez of MH Tax Services.” So it seems that IR is encouraging or recognizing that for at least some Americans Abroad their best way to go is to renounce…

My friend says that he does not owe any taxes because of Excluded Earned Income and Tax Credit. The problem are the penalties and the work to fill all the forms.

I listened to many stateside Americans now who have argued that a tax cheat is anyone, including Americans abroad, who joined OVDI/P or did a quiet disclosures for any reason. Yet, nowhere have I read that that the participation in any of such programs automatically defines one as being a tax cheat. There seems to be a misunderstanding on this.

Could someone please explain to stateside Americans that an individual with a local checking account containing taxed locally earned income, located outside of US jurisdiction, is not a tax cheat even if they got lured into joining one of these programs in response to threats, scare tactics, or due to their desire of being compliant with new policy changes?

Many people who DIDN’T EVEN KNOW they were US citizens, and US citizens and green card holders who were previously unaware of their tax filing and reporting obligations chose OVDI from the very few options available. How many stateside Americans would sputter if you told them that? What would they say if you told them that the vast majority of people under those circumstances have done NOTHING about becoming tax compliant? Of course the folks of this mind set you describe wouldn’t want to believe that someone would be less than ecstatic about being American and paying for the privilege of being one even when they get nothing in return.

Mr. Wood, this is a good article but like a previous commenter said you should do an article on he plight of Americans abroad and Green Card Holders who are being persecuted by policies aimed at homeland tax cheats.

In any case, the most striking thing about the GAO Report is that by they think the purpose of offshore enforcement is to generate penalties. Otherwise, why would quiet disclosures (filing and paying tax and interest) be such a problem? So, we are know in a position where:

Those who use the Offshore Disclosure programs will certainly be destroyed (even if they successfully opt out they are faced with enormous legal fees), and;

Those who do quiet disclosures, if discovered will be treated just a poorly.

Question: Why would anybody bother to come into compliance? It’s clear that the only purpose is to punish and generate penalties. The punishment is for the failure to file the FBAR form which nobody even know about prior to about 2011. But, somehow that doesn’t matter. Why not? Well, because the FBAR (which has no purpose whatsoever) is being used as a kind of “Fundraiser” for the IRS.

How sick is this? Rather than playing along with this the legal profession, including you, should be using your position to call attention to this injustice and force a change in IRS policy. Could I remind you that the law requires people to file 1040s and FBARs. The IRS is clearly obstructing compliance with the law by threatening huge fines for compliance.

The ONLY thing that makes sense for US citizens abroad is to renounce US citizenship at the earliest possible moment (whether they are compliant or not).

The US is alone in having citizenship-based taxation. The US is using FATCA to enforce the immorality of citizenship-based taxation. The effect of FATCA will be to steal wealth from the treasuries of other countries who happen to have US citizens residing there.

Is it possible to have anything but contempt for such policies? American Exceptionalism? I am embarrassed to be a citizen of what was once a great country. Also, for those who didn’t know they were US persons, the IRS wants them to pay only 5% of their net worth as a penalty (Tribute to the US).

I agree with you about the “feeling ashamed” part. I’ve always done my very best in a multitude of situations here to defend the United States when faced with those who claimed to dislike or hate my home country. There are many outside the U.S. who feel that way. Through actions, words and deeds I sought to change their minds and change the face of the U.S. overseas wherever possible. Now I’m starting to think I was the one who was wrong. It’s also quite a slam to wake up and realize the U.S. only sees ex pats as a cash cow and cares nothing for the damages they may cause us. Doesn’t exactly make me feel like singing the “Star Spangled Banner” most days. I will have to renounce, it will be under protest but, I need to remember the U.S. I loved is one from long ago and not what she is today. So sorry to know this is fact but, sadly it is.

I always suspected the high FBAR fines were just to drum up penalty fees when they knew most expats a.) never heard of or were told about FBAR and b.) most owed zero U.S. taxes. So how to get money from those who didn’t owe tax? Huge fines and fees of course on a paper most cross border professionals never even mentioned to clients. Indeed, the IRS never mentioned it, banks never did no one. So instead of looking at those who would not have owed any U.S. tax and allowing them to file FBARS as they became aware without penalty they are desperately seeking funds out of these people who have little to no representation in the U.S. government. Whoever thought up this plan is brilliant…if immoral.

Too bad the majority of the U.S. press hasn’t pointed out the rather underhanded way this all works against average citizens who have committed the “traitorous” act of daring to live outside the borders of the U.S. Nevermind, that this will have long term very negative implications. Where I live there is a lot of anti Americanism.

The best defence the U.S. has had against this is having its happy citizens here putting on a great face for their country for a very, very long time. Many a U.S. S.O.S. have come here and proclaimed us the “best ambassadors the United States has around the world” to quote one recently. I’m afraid that won’t be so after FATCA and the FBAR fatwa. Someone is not thinking long term here of the very negative consequences to the United States. At the moment they believe these will be minimal but, over time they will not. Those who previously sought actively to defend the U.S. and to show a positive light to that country to other countries citizens will not be enthused to do so in the future.

Do ex pats have a value to the U.S. other than being shamed and slammed and fined? They surely do! However, the U.S. is so short sighted they have not noticed this advantage. That’s sad, as I don’t think we’ll see this attack on U.S. citizens living their lives abroad abate before other financial, social, and international relationships are severely damaged.

Those “ingrate” Mr. Kelly talks about include a US military vet who would have lost the mortgage in his home in Switzerland where he moved for employment after he lost his job in the US.

They include a Canadian police officer of 33 years who was born in Maine over five decades ago when his mother was sent there to give birth. Having lived his entire life as a Canadian, he is not prepared for the United States to seize his family’s financial records.

They include a grandfather in Sweden who asks “Why is the American I love doing this to us?”

They include a woman with multiple sclerosis who was told 41 years ago by the US Consulate she was “permanently and irrevocably relinquishing US citizenship by becoming a citizen of Canada.

They include stay at home mothers around the world married to men who have no connection to the US other than the love of their spouse.

They include honest, law-abiding people of all ages and occupations who are earning an income, paying taxes and supporting families where they live and work.

With FATCA, the United States has totally alienated the very people who could be their best unofficial ambassadors.

Why does the US government chase their citizens living overseas and yet make no effort to tax the breathtaking sums of money that Apple / Google / Amazon etc. keep off shore?

Why?

Because Apple / Google / Amazon / Starbucks etc. all make huge political contributions and the corrupt Washington establishment can not survive without their financial support.

So the US Government harasses ordinary citizens, who have chosen to live overseas, in a gesture of absolute contempt for the concept of democracy.

Remember the cry ” no taxation without representation” – well your government has surely forgotten this founding mantra of the USA and shame upon it and upon the whole USA and all its people for doing so and for allowing the Hitlerite IRS to badger the little guy.